Extraterrestrial planets aside, it's a fair point. Google's fleet undoubtedly has more machines than Amazon's in total, and that might give Google better economies of scale even though it isn't the leader in the utility computing space. However, there are several other considerations. We don't know if the main google.com fleet is made up of the same types of machines as the ones used for Google Compute Engine; for example Google can much more easily tolerate a high failure rate for a single machine than a startup renting a couple of instances. There are also more costs to consider than just the hardware, customer support being a big example.

Overall, I'd say that Google can certainly undercut Amazon on price, but at the cost of reducing the margins that its executives and shareholders are used to seeing. They might see this as a worthwhile tradeoff if they see utility computing as a strategically important space; but personally I don't see that space as a long-term threat to Google in the same way social networks or mobile phones were. But I'm certainly happy to see Google compete here; I benefit as much as any other startup from a price war.